HBC’s activist investor has been here before
Jonathan Litt had sharp words for Peter Munk’s Trizec in 2002, now he has a plan for retail giant
Jonathan who?
The last time Jonathan Litt’s name circulated through Canada’s capital markets, he was barking up Peter Munk’s leg in a way Mr. Munk did not like.
Now he’s back, with a plan for the Hudson’s Bay Co. to, you know, unlock shareholder value.
In 2002, Litt was senior retail analyst with Salomon Smith Barney, with a specialty in real estate investment trusts, or REITs. Litt had some sharp views about the corporate governance at Peter Munk’s Trizec, which had converted its principal U.S. holdings — 74 office towers — to a REIT that spring while retaining control through multiple voting shares of the initiating Canadian company.
Litt liked the conversion. What he didn’t like was this crazy Canadian special voting structure. “The root of the issue is the lack of corporate governance in place at the company as a result of chairman Peter Munk’s control of the board,” Litt wrote in an analyst’s note.
“We see no easing in the pain for TRZ shareholders.” JONATHAN LITT ANALYST’S NOTE CRITICAL OF TRIZEC CORPORATE GOVERNANCE IN 2002
“This control has resulted in key decisions being made driven by a desire to preserve the tax basis rather than maximize shareholder value. We see no easing in the pain for TRZ shareholders until the current structure is collapsed and Mr. Munk’s control over the election of TRZ’s board is eliminated.”
During an analyst’s call, Litt suggested Munk wake up to the new world of corporate governance — the WorldCom executives had just been arrested, he pointed out — and lowered his analyst rating from “outperform” to “sell.” The stock took a hit.
Munk sued for defamation. The case was settled in the spring of 2005 with Citigroup Global Markets — the renamed Salomon — apologizing for “any embarrassment” the statements may have caused. Citigroup additionally donated $2 million to the Peter Munk Cardiac Centre at Toronto General Hospital.
Just because we up here haven’t heard much from Litt in the ensuing years doesn’t mean he’s been quiet. He runs his amusingly named Land & Buildings investment management company from Stamford, Conn., branding itself as a REIT specialist with an activist focus.
Consider Litt’s march on Taubman Centers, Inc., the U.S. retail company that has grown into Asian markets and is still run by a Taubman nearly 70 years after its creation.
Few words have been minced. “The Taubman shareholder experience has been nearly 25 years of abysmal corporate governance practices and repeated capital allocation mishaps,” Litt said in an investor presentation last October. The push for governance reform has had the support of the high-profile Institutional Shareholder Services and has resulted in promises from the company for accelerated board “refreshment.” Litt lost the battle to attain a board seat. Last week, he called on the company to make good on the refreshment promise by committing to the replacement of three directors by no later than the 2018 annual meeting.
Litt founded his company in 2008 but, according to Forbes, didn’t turn to activism until 2012. “He examines hundreds of stocks in search of underappreciated real estate or asset-rich companies with operational problems and stretched balance sheets,” the magazine wrote in a profile in June of last year. “Then he proposes fixes, either through management change, portfolio disposals or outright company sales.”
In putting HBC on his radar, Litt, who has accumulated about 4.3 per cent of the company’s stock, appears to be taking a more courtly approach. No question, Hudson’s Bay under Richard Baker saw impressive sales growth in earlier years, but finds itself now in straightened circumstances. Announcing a loss of $221million for the quarter ended April 29 versus a loss of $97 million the previous year, the company has embarked on a cost reduction and restructuring strategy that includes a significant slashing of its workforce, by 2,000 employees.
Litt thinks he has divined the path forward via the company’s real estate holdings. “With real estate this valuable, there are a myriad options for value creation, all of which must be explored,” he wrote in a release Tuesday. In a bit of retail sacrilege, he asks whether the Saks across from the Rockefeller Center —“likely one of the most valuable locations not only in Manhattan, but in the United States” — is really reaching its “best use” potential. (HBC acquired Saks in 2013.) Why not turn it into a hotel!
Litt doesn’t break out the specific potential for the company’s Canadian assets. HBC sold its 189 Zellers leases to Target in 2011 for $1.8 billion, leaving a long list of Bay leases, a few owned Bay stores and leased Home Outfitters properties. The company’s Canadian imprimatur is evident in its heritage products — Hudson’s Bay blankets, etc. — but has long since faded as a Canadian entity.
Richard Baker has consistently emphasized the important contribution of the real estate portfolio overall, particularly the financing options it allows the company to pursue. And I suspect that Mr. Litt isn’t proposing anything that Mr. Baker hasn’t already considered. But turning Saks into a hotel? Or, worse, an office? Why not just cede retail defeat?
The risk, of course, is that Litt is pushing for short-term results over the long-term view. He hasn’t yet suggested that there’s been anything amiss in Baker’s leadership. At least not yet. But this is just round one. Jennifer Wells can be reached at jenwells@thestar.ca.